The implications of massive high-frequency trading are becoming increasingly clear in equity markets and other financial markets. In recent years high-frequency trading has not only increased vastly in US equity trading, but in the last ten years has extended widely to other major international exchanges. High-frequency trading from its origins attracted the interest of regulators concerned about the impact on market integrity and stability. However, it was the publication of Michael Lewis’s best-selling book Flash Boys that alerted the world to the imminent dangers of this form of trading. Regulators are now confronted with the dilemmas of attempting to regulate an industry operating at the speed of light.

A. Introduction

The dangers of massive high-frequency trading (HFT) are becoming increasingly clear in equity markets and other financial markets. HFT is a form of algorithmic trading per- formed by computers, to rapidly move into and out of trading positions in microseconds in order to capture fractions of a cent profit on every trade, which when magnified by millions of trades quickly yields a substantial return. In contrast to traditional buy-and-hold investment strategies, HFT firms do not need to employ large amounts of capital, do not accumu- late positions, nor hold portfolios overnight.Trading on tiny margins, their large gains are through speed and frequency combined with fractionally earlier access to information.1 The awesome power of this technologically driven approach to trading is hard to imagine: in a single day in October 2008 one HFT firm exchanged over 2 billion shares, amounting to 10% of US equities trading volume for the day.2 Carol C Clarke of the Federal Reserve Bank of Chicago accurately captures the technical essence of this radical automation of trading:

“A small group of high-frequency algorithmic trading firms have invested heavily in technology to leverage the nexus of high-speed communications, mathematical advances, trading, and high-speed computing. By doing so, they are able to complete trades at lightning speeds. High-frequency algorithmic trading strategies rely on computerized quantitative models that identify which type of financial instruments to buy or sell (eg, stocks, options, or futures), as well as the quantity, price, timing, and location of the trades.These so-called black boxes are capable of reading market data, transmitting thousands of order messages per second to an exchange, cancelling and replacing orders based on changing market conditions, and capturing price discrepancies with little or no human intervention.”3

A legal challenge against the Commonwealth Bank to clarify the right of shareholders to have a say in how companies are run has been launched by the Australasian Centre for Corporate Responsibility (ACCR).

Environmental Justice Australia filed a case against the Commonwealth Bank of Australia in the Federal Court of Australia, on behalf of the ACCR. The case seeks a declaration that shareholders have a right to put ordinary resolutions about the management of the company to its Annual General Meeting.

Acting for the ACCR Felicity Millner, director of litigation, Environmental Justice Australia, said the Federal Court hearing was a “test case” about the rights of shareholders to put ordinary resolutions to company AGMs.

“If successful, it will provide an important new avenue for shareholders to promote corporate social responsibility,” Millner said.

Last year the ACCR put a shareholder resolution to the Commonwealth Bank asking it to report on its financing of the fossil fuel industry and exposure to risks from climate change.

The CBA did not put the ordinary resolutions on their AGM agenda. Instead the CBA board said the only valid option open to the ACCR was to endeavour to change the constitution of the bank, which required a higher (75% versus 50%) voting threshold to be approved, the ACCR case states.

Ordinary resolutions avoid the need to change the company’s governance rules when shareholders simply want a single issue considered. As such they are a much more practical and accessible way for shareholders to express their concerns about the company’s practices, Millner said.

“Australian law is unclear about whether shareholders have the right to put ordinary resolutions to company AGMs, expressing an opinion about the management of the company. Companies have been acting on the assumption that they do not. This case will set a precedent which will apply to future AGMs of listed companies in Australia,” Millner said.

The CBA welcomed the participation of shareholders and other groups in Annual General Meetings, and balanced this with the need to run meetings effectively, a spokesperson for the bank said.

“A company is only required to put a proposed shareholders’ resolution to its general meeting if it is properly constituted. A company is not obliged to put forward a resolution that simply contains an expression of opinion by a particular number of shareholders.

“In this case, ACCR sent a letter to CBA in September 2014 notifying it that it proposed to “move a resolution” at the Group’s 2014 AGM.

ACCR’s letter only asked CBA to put forward one of three proposed alternative resolutions to the AGM. CBA put forward the only proposed resolution that was properly constituted.

“As the matter is still before the Court, we will not be providing any further comment,” the spokesperson said.

The case was heard on Monday June 1 at the Federal Court in Melbourne before Justice Davies. A decision is expected within three weeks though it could be longer.

26 November 2014

IAN T DUNLOP

STATEMENT IN SUPPORT OF APPOINTMENT TO THE BOARD OF BHP BILLITON LIMITED

Chairman, thank you for the opportunity to speak in support of my nomination to join the Board of BHP Billiton (BHPB).

Ladies and gentlemen, as last year, my platform for election is the climate change and energy challenge we face, specifically its implications for BHPB shareholders.

At the BHPB Plc AGM in London last month, I congratulated the Company on the action it has taken since I raised these matters last year. With its new climate change policy and scenario analysis, BHP Billiton is undoubtedly setting the standard for the global resource industry. The Chairman’s comments this morning that further low emission technology initiatives are planned are also encouraging.

However, the real issue remains the urgency with which climate change must be addressed. Developments since the London AGM emphasise that the even new BHPB policy is wholly inadequate in this regard.

Earlier this month, the Intergovernmental Panel on Climate Change (IPCC) issued its bluntest warning yet in their 2014 Synthesis Report, calling for urgent action if “severe, pervasive and irreversible impacts” are to be avoided. And this is a conservative, lowest-common denominator, consensus, which ignores the big risks of positive feedback “tipping points” already becoming evident in the Arctic, Antarctic, the Oceans and elsewhere. Once they take hold, they may well be irreversible.

The International Energy Agency’s 2014 World Energy Outlook, released last week, warns that current and planned policies will lead to temperature increase in excess of 40C - to contain temperature below the official 20C target requires global emissions to peak within 5 years and then reduce rapidly.

Even then, evidence suggests that a 20C temperature increase will halt population growth in large parts of the world. A 40C increase will see substantial population decline, with escalating social conflict, as we are already seeing in the Eastern Mediterranean.

Why is this important for shareholders? As the Chairman stated earlier, the prosperity of BHPB depends upon a stable and growing global economy. This is incompatible with even a 20C temperature increase. Growth now depends upon a rapid transition to a low-carbon world. Stability requires urgent action, as further delay is cutting off our options to make that transition in good order.

The low-carbon economy represents the greatest value creation opportunity in human history, provided it is seized with proactive leadership. That is the leadership which BHPB must now demonstrate, and despite recent progress, I do not see that happening yet.

The Company’s risk management approach shows no sign of real urgency. It must go beyond the conservative IPCC conclusions to encompass the “tipping points” we now see developing.

The new policy implies a temperature increase of around 30C, which would be extremely damaging to shareholder value. It assumes that “fossil fuels will continue to be a significant part of the energy mix for decades”, which in a world with virtually no carbon budget remaining today, is nothing less than suicidal unless emergency programmes are initiated to make solutions such as Carbon Capture and Storage really work. There is no sign of BHPB, or the industry, making that commitment. Indeed the coal industry lost interest in the technology a decade ago.

The Minerals Council of Australia, and the Business Council of Australia, substantially funded by BHPB, continue to undermine any sensible policy development, and BHPB itself has done nothing to contest the Australian government’s blatant climate change denialism.

Most importantly, BHPB’s strategy must move away from incrementally changing “business-as-usual”, to focus on rapid transition to the low-carbon economy, not least to avoid losing major opportunities for shareholder value creation.

Ladies and gentlemen, the Board has recommended against my appointment on the grounds that my experience and expertise do not meet the requirements of a BHPB Non-Executive Director. This response highlights governance issues which have lain dormant for years, as remuneration-driven short-termism has dominated corporate thinking.

I have the greatest respect for the competence of the existing board in a conventional sense. However, these are not conventional times and those self-same conventional skills are, in my view, blinding the Board to the great changes already taking place in the climate and energy arena.

The Chairman has emphasized the sophisticated succession-planning approach used by BHPB. My concern is that these conventional processes ensure that directors are appointed in the existing Board’s own image. Whilst this may have been acceptable in the days of relatively predictable growth, in creating the low-carbon world we are in the midst of the greatest discontinuity, and opportunity, the world has ever seen. Company prosperity now depends upon avoiding myopic “groupthink” by complementing conventional skills with further board diversity and unconventional perspectives.

At the most fundamental level, it raises yet again the question of “What is a Company For?” Is it to supinely follow, and be shaped by, the dictates of dysfunctional governments and the market, optimising short-term returns? Or is it to use its undoubted influence and expertise in shaping a genuinely sustainable future?

Despite having access to the best possible scientific and risk advice, corporate leaders including BHPB, seem to take the former view. As a result, we are witnessing a fundamental failure of risk management and corporate governance as directors, in underplaying the real risks of climate change, abrogate their fiduciary responsibility to objectively assess and manage those risks and opportunities in the interests of their companies in perpetuity, not just in the short-term. Investors, with some notable exceptions, are equally complicit for not insisting that boards of directors take far more vigorous action.

Many commentators claim that BHPB and other companies are engaged in a “race-to-the-bottom” as iron ore demand slides, grabbing volume at all costs. I do not want to buy-in to that argument, but what I do know is that we cannot afford a “race-to-the-bottom” in fossil-fuels! BHPB, along with likeminded progressive organisations and investors, in their own self-interest must now publicly articulate the need for, and implement, radical action.

I believe that I am well-equipped to meet those unconventional needs and to assist in framing that action, so I appeal to you directly for shareholder support.

Thank you for your consideration, and thank you, Chairman, for the opportunity to speak to the meeting.

22 November 2014

Thomas Richter new Deputy Chairman at global funds association IIFA

Canberra, 23 October 2014 — Thomas Richter, CEO of the German Investment Funds Association (BVI) was appointed Deputy Chairman of the International Investment Funds Association (IIFA). This election took place at the Annual General Meeting in Canberra, Australia. Thomas Richter said: "This appointment reflects the international recognition of the BVI's work." Along with Paul Stevens of the Investment Company Institute ICI, who is the newly elected Chairman of the IIFA for two years, Richter will focus on a stronger positioning of the investment industry with regard to global regulation initiatives. At present, the IIFA is concentrating on topics such as shadow banking regulation and the global exchange of tax information by the financial authorities.

The IIFA represents the interests of the fund industry world-wide and is the central point of contact for in ternational institutions and organisations such as the IOSCO, the Financial Stability Board and the OECD. The 40+ IIFA members from six continents manage assets of USD 32 trillion. The IIFA is dedicated to promoting an understanding between the investment industry, politics and regulators as well as improving the overall conditions for investors. As a founding member, the BVI has been with the IIFA since 1986

16 June 2014

The impact of financialisation on international corporate governance: the role of agency theory and maximising shareholder value

THOMAS CLARKE

Affiliation?

The phenomena of financialisation has had a universal and pervasive impact upon economies and societies in recent decades. Global finance is now typified by a more international, integrated and intensive mode of accumulation; a new business imperative of the maximization of shareholder value; and a remarkable capacity to become an intermediary in every aspect of daily life. The finance sector has progressively increased its share of GDP, and even for non-financial corporations the pursuit of interest, dividends and capital gains outweigh any interest in productive investment. As non-financial corporations have become increasingly drawn into a financial paradigm they have less capital available for productive activity. These financial pressures are translated into the operations of corporations through the enveloping regime of maximising shareholder value as the primary objective. Agency theory has provided the rationale for this project, prioritising shareholders above all other participants in the corporation. This article seeks to discover the origins of the financialisation of corporations in the early development of agency theory and shareholder value in Anglo-American corporations. The enduring myths of shareholder primacy are examined. The article concludes with a consideration of how the reform of corporate law might serve to strengthen the recognition and pursuit of the wider purposes of corporations and longer-term investment horizons. <more>

5 September 2013

With the AGM season fast approaching, ASA (Australian Shareholders' Association) monitors are now in full swing preparing voting intentions. Find hereafter just posted the updated list of the companies monitored for the rest of this year. The 2013 list can be accessed from our home page. If you have shares in a monitored company, we encourage you to appoint the VIP with your proxy and we will be in charg to forward this.

I'm afraid, there are other more knowledgeable people on this situation!

I would only say that the subsidiary resisting the parent does not look like a good outcome for the subsidiary. It is Spanish corporate governance meeting the definance of Australian corporate governance and the notion of 'independence'. It would behoove the Spanish parent to be cautious or they will see their cash cow in Asia-Pacific lose its lustre. Of course, the possibility of it being spun off isn't too far off either!

18 November 2012

2012 CHANGES TO THE GLOBAL INTERNAL AUDIT STANDARDS

SIX THINGS

AUDIT COMMITTEES AND CHIEF AUDITORS

NEED TO KNOW

OCTOBER 2012

SUMMARY

In October 2012 the Institute of Internal Auditors (IIA) released their latest revisions to their global standards. These standards come into effect from 1 January 2013.

The IIA’s global standards board have held global webinars to give insights not only into what was written, but what their thinking was at the time. As a former member of the IIA’s Global Professional Practices Council and protagonist of some of these changes, we were very keen to understand some of the subtleties in what has changed and why.

Our assessment is that while at first glance many of the changes appear to be semantic word changes, there are six key areas that chief auditors and audit committees will want to be across.

In this brief we provide a summary of each issue, together with our interpretation and actions that organisations can and should take now to comply while also getting more out of their internal audit function.

In its latest annual series of reports on corporate governance issues in Australia, the Australian Council for Superannuation Investors (ACSI) has published research by the investor-activist group, Ownership Matters, into proxy voting, in particular "the inner workings, the idiosyncracies and anomalies" (Byrne 2012) of the voting process. This report publishes the changing, dynamic environment in ensuring shareholders and stakeholders can keep their companies responsive and accountable.

On June 20th, the Australian parliament passed new laws (Corporations Amendment [Improving Accountability on Director and Executive Remuneration] Acti) which have a significant impact on the reporting of the executive remuneration of public companies. These laws also go some way to empower shareholders whose dissent over the failure of boards to link executive remuneration with performance was previously ignored.

These laws amend significant sections of the key Australian legislation governing companies, the Corporations Act, and they apply from the 1st of July. Where previous voting on remuneration reports on Australian companies were non-binding (that is, even when a majority of shareholders vote down the reports, the vote is ignored by the board and reports are still passed), this legislation binds the vote and makes them legally enforceable.

These laws also will force a renewal of boards – that is, directors face compulsory re-election - if shareholders repeatedly vote down a company’s remuneration report. Specifically, the amendments to sections 249L(2) and 250U-Z are the spill amendments because they allow a board spill to occur after two consecutive annual general meetings if shareholders are continually dissatisfied with the company’s remuneration report:

Section 249L(2) applies the “two-strikes” rule which refers to the circumstance where a remuneration report is not well-received. The “first strike” is when at least 25% of shareholders vote against the remuneration report. The board is given the chance to explain to shareholders justifying the remuneration and/or change the report at the next annual general meeting. If at the next annual general meeting the remuneration report is voted down again by more than 25% of the company’s owners, this is called the “second strike” and shareholders can vote for a board spill (which means a new board).ii

Section 250V is the spill resolution as it requires a fresh election of board directors within 90 days after the second strike occurs.

These two sections emphasise the necessity to have a majority of shareholders be satisfied with the remuneration report of the company’s executives. Shareholders now have the power to elect a new board due to remuneration issues. These sections also focus the spotlight on boards of directors and their responsibility to be attuned to the requirements of their companies’ shareholders and the wider investing community that remuneration must reflect the performance of their executive management.

Furthermore, the amendments cover issues such as:

Ban on hedging the remuneration of executives (section 206J)

Improving disclosure practices on the hiring and using of remuneration consultants by the board (sections 206K-206L). Significantly, section 206M(2) requires that the remuneration consultant must declare whether s/he made his/her recommendations “free from undue influence” from executives of the company.

Proxy voting by executives or their related parties (section 250BD)

Discussing board policy over executive remuneration (section 300A)

Australian companies have now been put on notice to have better awareness over the impact of their remuneration report and greater dialogue with their shareholders. In a couple of years’ time we may see the first cases applying these amendments.

These laws improve the accountability of managers to their shareholders where it matters most by giving the latter power and say over the former’s remuneration: a power long overdue to the owners of corporations.

The failed takeover by the Singapore Stock Exchange (SGX) of the Australian Stock Exchange (ASX) was cemented this week when the Foreign Investment Review Board (FIRB), in only its second disapproval of a foreign takeover of an Australian company in over a decade, stated that it was not in the national interest for this to go ahead.

There are many factors why the proposed takeover failed. The most fundamental factor is the institutional cultural aspect. Singapore and Australia are the most developed countries in the region but the similarities end there. Both countries’ economic development have been achieved differently. The strong paternalistic state led by the formidable Lee Kuan Yew ensured that the country would be limited to a one-party state directed by Lee under the umbrella of “Asian values”. The family’s achievement in this island state has been recognised with the son of Lee Kuan Yew now Prime Minister while his daughter in law as head of the country’s sovereign wealth fund, Temasek. Unlike other business families in the region, the Lee Family has ensured its interests in both private and public sector spheres.

Australia, on the other hand, has had a more consensus approach towards economic development and faces the bane of democratic countries everywhere in that decisions need to go through different layers of processes, consultation and the approval of many institutions. One critical factor was that Parliament’s approval was required for any ownership stake greater than 15% of the ASX – this clause was to ensure no stakeholder group - be they stockbrokers, institutional investors, or in this case the Singaporean government - would have a dominant stake in the exchange. This is similar to other stock exchanges in the region where governments have ensured that while exchanges were demutualised, the controlling stakes were closely monitored.

Reciprocal ownership control is a sensitive issue in an environment of trade liberalisation and the question has been raised as to whether the ASX could have proposed a takeover of the SGX without obstacles. Indeed, Singaporean companies do have heavy foreign ownership control limitations and any takeover of the SGX by a foreign entity will be bluntly met by legislation, if not the same nationalism sentiment supporters of the takeover have accused Australian opponents of the takeover of being infected with.

But based on the record of the FIRB, this has not been the case. Australian companies especially in the lucrative extractive and agricultural industries have been bought by foreign entities be they Canadian, American or even Chinese state owned companies.

Hence, the question is why did such a proposed takeover take place? Perhaps the senior managers of the stock exchange shared the chemistry that infects business relationships anywhere and they were unanimous in the tie up regardless of laws and sensibilities – not to mention their remuneration had the deal gone ahead. Indeed, the CEO of the SGX is a charismatic Scandinavian Magnus Bocker who was involved in the consolidation of the Scandinavian stock exchanges that led to the OMX. However, what he failed to realise is the context of this takeover. Scandinavian countries share similar values, outlook and cultures – far more than paternalistic Singapore and laidback Australia. This lack of recognition or even respect for Australia’s institutional particularities ensures Bocker’s reputation as a bold dealmaker extraordinaire but this failed takeover mean his ambition for a similar Asia-Pacific tie up straddling different cultures and values has been thwarted.

When the ultimate shareholder of the ASX would have been the Lee Family through their investment vehicle Temasek, there was a great deal of discomfort over this scenario in Australia where share ownership is far more widely dispersed with institutional investors dominating – not business families. Australia is a democracy, not an oligarchy.

The Australian corporate governance system is healthy, robust and a hallmark of the strength of the institutional environment. Australia’s institutions are its main competitive national advantage in this region and that includes the ASX.

27 February 2011

Deutsche Bank and Board Diversity

It has not been a good month for Deutsche Bank (DB).

Firstly, Europe’s most prominent banker, Josef Ackermann, stated at the company’s annual general meeting that the lack of female executive directors on the DB 7-male management boardi was something he hoped to address as their addition would bring some colour to the boardroom. ii Not talent, wisdom or experience but adornment.

The bank also does not have a woman representative on its executive committee whose membership are eventual nominees to the board despite women making up 44% of the bank’s workforce but only 16% % of its senior management.

Ackermann’s perspective reverberated around the corporate governance sphere as seemingly outdated views on female gender representation from an influential global financial leader proved not to be so outdated. DB’s response was to dismiss this as part of Ackermann’s character representing the traditional mould. Upon closer inspection, perhaps this should not have been a surprise.

In 2010, a study by the German Institute for Economic Research found major under-representation of females on Germany company boards with only 2.5% of executive board members in the DAX-200 comprising of women and 10% in supervisory boards.iii For DB, the first and last time it had a female executive board member was in 1996 with Ellen Schneider-Lenné.iv

What compounded this comment is the stark contrast between female representation in the highest level of the German business sphere with its counterparts in the political arena. The German head of government is Chancellor Angela Merkel and out of 16 federal cabinet members, 6 (or 37% of the cabinet) are females (Merkel; Kristina Schröder – Family Affairs, Senior Citizens, Women & Youth; Annette Schavan – Education and Research ; Ilse Aigner – Food, Agriculture & Consumer Protection; Ursula von der Leyen – Labour and Social Affairs; and Sabine Leutheusser-Schnarrenberger – Justice).

Soon after this kerfuffle, the German carmaker Daimler appointed former German constitutional court judge Christine Hohmannn-Dennhardt as its first ever female board member.v

As the corporate world in OECD countries is increasingly under pressure to improve gender representation in the boardrooms (Australian listed companies are required to have a diversity policyviand the UK Davies Report has recommended a minimum target of 25% female on FTSE 100 boards by 2015vii), the struggle continues for women to be recognised for their talents and not be treated as mere adornments.

In a revealing article in the Economist, corporate France seems to be similarly afflicted by the Ackermann perspective with Gallic chief executives said to:

“…look for female board members of a particular type: those who will look decorative and not rock the boat. One boss asked a headhunter for photographs of candidates and said he would treat looks as his first criterion, ahead of industry experience. A board member of a multinational company who opposes the 40% quota said that bosses could simply appoint their wives or—more subtly—their girlfriends.”viii

As France’s employers’ union MEDEF President (Ms) Laurence Perisot so eloquently put it: “sometimes we have to use the law pour encourage les autres.”ix

While DB has put this incident behind it, a couple of weeks later its Korean subsidiary was found to be engaging in market manipulation on the stock marketx and the Korean regulator, the Financial Services Commission, has banned its proprietary trading unit for six months. As the Financial Times noted, the country is not willing to compromise the stability of its financial markets for what DB calls “standard international practice.”xi

This research aims to capture the state of play of board and director evaluation processes both internationally and in Australia. Board evaluation is becoming widely established in companies internationally, and in large Australian corporations the commitment and rigour surrounding board evaluation is increasing. Board evaluation processes may have proved nominal in the past but presently board evaluation in large corporations is seen as an essential tool to assist in achieving better board performance and effectiveness.

This report provides a survey of processes of company board evaluation and explores their value in improving board performance. The survey examines the policy and practices of international corporations and a selection of Australian companies in the large listed sector.

The first stage of the research involved an analysis of information on board evaluation as published by a sample of companies world-wide. This allows a comparison of Australian companies with international companies in terms of their regulatory environment and how they communicate with shareholders about their efforts to improve board effectiveness and performance. The companies surveyed were from the ASX 30, NYSE 10, Euro 10, FTSE 10 and TSE 10.

The second stage of the research consisted of interviews with Australian directors and investors to explore their perspectives on board evaluation; its association with board effectiveness and performance; and their views on potential improvements to board evaluation. Interviews were conducted with 12 directors who sit on 26 boards from the ASX 100.

The report is a comprehensive summary of current practices in board evaluation.

Key Findings

International variance

Disclosure on board evaluation is strongly influenced by the regulatory approach of each country. In the US where a rules-based approach to regulation is prevalent, disclosure is relatively standardised and perfunctory. In the principles-based jurisdictions (Australia, UK, Canada and some European countries) there is the opportunity for richer disclosure although a common format is still apparent with only a few companies voluntarily offering more (or different) information.

Flexible processes

As with all corporate governance processes, a performance evaluation process needs to be adapted to a company’s circumstances including the stage of the corporate life-cycle and length of tenure of board members. The same process does not have to be used every year.

Continuous improvement

An effective board will not save any performance issues for discussion during the annual board evaluation but will undergo a continual self-improvement process. Good boards will be proactive, not only assessing themselves retrospectively but prospectively.

Individual performance

Opinion is divided on whether performance evaluation of individual directors is a valuable exercise or whether it can inhibit whole-board dynamics and group performance. There perhaps needs to be more discussion over why, in the context of a board, the individual can be less important than the team.

Senior management

The relationship between the board and senior management is vital to effective board performance in terms of information flow and strategy development. For this reason, it is good practice to involve members of senior management in the board evaluation process.

Informal discussion

Many board members find that board effectiveness can be greatly enhanced if the board members, particularly non-executives, have a chance to get together outside of formal board meetings to discuss issues that might not fall within the formal meeting agenda.

External facilitation

The general opinion is that the use of an experienced external consultant can be very valuable but may not be justified every year. External reviews are costly but may be particularly useful when the board is going through change.

The process of implementing the outcomes of board evaluation is a crucial step that perhaps deserves more attention. It is a vital component in whether a board evaluation process actually leads to better board performance.

Links to other processes

The links between the process of board evaluation and other processes such as director re-election, succession planning and director education and development are becoming clearer and more formalised in practice.

The effective board

Factors necessary for effective board performance include: • a boardroom culture of mutual respect, honesty and openness that encourages constructive debate • diversity of experience, styles, thought and, as far as possible, age, gender and nationality • a good relationship with the CEO and senior management • a common purpose and strategic clarity • an experienced chairperson who can manage the board agenda, encourage debate and work in harmony with the CEO • efficient board structure and processes including committees, board papers, information flow and a good company secretary

The dysfunctional board

Factors that can hinder board effectiveness include the opposites: • an adversarial atmosphere in the boardroom or an unmotivated board with a tendency to group-think • skill deficits or lack of genuine independence on the board • a poor relationship with the CEO and senior management which can impede information flow • conflicts of interest or factional interests on the board, perhaps due to a dominant shareholder • poor chairmanship – a chair who is too week, too autocratic or too close to the CEO • poor processes leading to inefficient use of time

Skills matrices

Boards are creating detailed matrices of the skills required on the board and are using these in their succession planning and nomination processes. However, there is still room for improvement in succession planning in order to reduce the influence of dominant board members and to improve long-term plans.

Disclosure

Some directors were open to the concept of increased reporting on board evaluation including providing more detail on non-sensitive outcomes. Others were of the view that this was of little value and, interestingly, the fund managers we spoke to agreed. It seems that the institutional investors place little value on annual report disclosures preferring to assess board members based on their backgrounds and personal characteristics.

Company performance

Both directors and fund managers understood that the link between board performance and company performance is complex and that even the best of boards can be hindered by factors beyond their control.

Indicators of an effective board

Both directors and fund managers agreed that it is difficult for outsiders to assess whether a board is performing effectively. However indicators include: • willingness of a company to seek and respond to market feedback • personal characteristics and credibility of directors • professional history of directors • company performance within the industry • quality of board decisions, particularly in times of crisis

Representatives from the Australian Institute of Company Directors, Australian Shareholders Association, Chartered Secretaries Australia, and members of ACSI and the Australian Stock Exchange Corporate Governance Council were in attendance at the launch of the report.

On Leighton Holdings’ CEO Wal King AO, German Hochtief AG and Spanish ACS

On 13 September 2010, after much speculationi, Leighton Holdings, the listed Australian engineering group announced the retirement of Wallace “Wal” Macarthur King after 23 years as Chief Executive Officer and Managing Director.ii King is regarded as one of the finest CEOs in the country and this announcement ends the illustrious and his brilliant career at Leightons. The following laudatory excerpts from press releases by Leighton’s stakeholders duly reflect the estimation held by his peers and the close identification of King’s role with Leighton:

"Wal King has made an enormous contribution to the development of the Australian construction industry and has been an outstanding leader in industry affairs."- Australian Constructors’ Associationiii

“Wal King is one of Australia’s most successful and well-respected corporate leaders who has made an enormous contribution to the construction industry in Australia and throughout the world. Wal is one of a kind - a real intellect with extraordinary energy and an engaging personality. He has a genuine love for his company, his industry and for the people who have worked for him over more than four decades…He has delivered extraordinary value for Leighton shareholders and for the tens of thousands of people that have worked on Leighton company projects in Australia and globally. He has always had a big view of Australia’s potential performance and had the courage to take the risks that would see the Leighton Group become a long-term participant in Asian and Middle-Eastern construction and mining markets.”-Australian Industry Groupiv

“Wal’s contribution to the Australian construction industry over a long period is widely acknowledged. Members of the Business Council of Australia (BCA) have appreciated his straight-talking style and the courageous way he is prepared to speak out on important public policy issues, particularly infrastructure and workplace relationships reform.” –Business Council of Australiav

Under King’s leadership, Leighton Holdings expanded and has a diversified portfolio of assets in construction and construction-related interests through its subsidiaries including Thiess Australia, John Holland and Leighton Contractorsvi. In October 2010, Leighton had a market value of A$11 billion.vii

Hochtief and ACS

Hochtief is a German construction group and is the parent company of Leighton Holdings. According to Leighton Holdings’ 2010 Annual Report, the top 5 shareholders are Hochtief, which has an ownership stake of 54.5%, and single-digit ownership figures from institutional investors. This is reproduced in Table 1 below:

King’s departure was said to be instigated by Leighton Holdings’ parent company, the struggling German construction group, Hochtief AG. In recent years, Leighton has flourished while Hochtief struggled. ix Hochtief has majority ownership of Leighton but did not have control over the board of its Australian subsidiary under King. King’s ousting was an exercise of control by the parent over its subsidiary. King’s replacement is the company’s Chief Operating Officer David Stewart who has the approval of Hochtief.x

On 16 September, Hochtief announced that it was the subject of a takeover bid by the Spanish construction company Madrid-based Actividades de Construcción y Servicios (ACS).xi In February 2010, ACS owned just under 30% of Hochtief’s shares.xii Furthermore, the current jewel in Hochtief’s crown, Leighton, could be subject to a “downstream” takeover bidxiii Hochtief has placed this extra obstacle in ACS’ way applying to the Australian companies’ regulator, the Australian Securities and Investments Commission (ASIC), that ACS be required to make an additional takeover offer for Leighton even if it could successfully takeover Hochtief.xiv This distinctively continental battle between two European giants has ensured that ACS’ takeover bid for Hochtief is far from straightforward.

Ironically, it has been reported Wal King has more cordial relations with ACS than Hochtief. xv Should ACS’ bid for control of Hochtief and Leighton succeed, Wal King’s departure from the leadership mantle of Leighton could be but a brief interlude.

In the July 10th 2010 edition of The Economist, the respected international current affairs magazine lambasted the United Nations body, the Intergovernmental Panel for Climate Change (IPCC) and in particular its chair, eminent scientist Dr. Rajenda Pachauri, over the failure by the organisation to respond quickly and immediately to Climategate (the release of damaging emails between climate researchers), which helped undermine a global agreement on climate change at Copenhagen last year.ii

Two weeks later, a deeply wounded Dr. Pachauri responded and explained amongst other things that the IPCC is an organisation that runs on £5m ($8.7M) a year, with the voluntary support of the intellectual contribution from the wider academic community, advancing the knowledge of climate science upon which the IPCC administers, coordinates, forms policies and publishes.iii

How can we say that we are serious about environmental issues when we only give $8.7M to a body that is the global authority on climate change issues? It is about time we seriously think about setting up a definitive global body on environmental issues in the way the World Trade Organisation (WTO) acts for trade, and tariff-related disputes and issues. The WTO experienced teething problems as it transformed from the General Agreements on Trade and Tariff (GATT), but it has proved an essential body as world trade continues to expand.

Like many people around the world, I felt saddened by the failure to reach a global accord at Copenhagen. The weakening of the resolve for urgent reform by the selective interpretation of data that foreshadowed Copenhagen, and the character assassination of climate scientists, was an exercise in industrial espionage of breathtaking proportions. A properly funded, independent and authoritative global environmental organisation dedicated to climate research is required to ensure there is no repeat of vested interests sabotaging independent science.

It is disheartening to see how the decade opened so brightly with a farewelling of, the carbon economy of the 20th century, and embracing the 21st century bold era of sustainable energy solutions, has dissipated so tragically with the disappointment of Copenhagen. Realistically, industry and trade are dependent on, and subsidiary to the environment – if there is no viable environment, there can be no viable industry or trade. Yet we now have the absurdity of having environmental issues treated as an adjunct of the WTO.

We need a proper and appropriate forum to advance science, develop policy and highlight significant issues: a World Environment Organisation (WEO) or Global Environment Organisation (GEO) as proposed at the 1992 Rio de Janeiro Climate Conference.iv

Firstly, this organisation will provide a forum to encompass the broad cathedral of issues advocated by different stakeholders. As Ian McGregor, a researcher at the University of Technology Sydney (UTS), describes there is a need to bring together the policy coalitions of the environment: governments, the private sector, the low-lying nation-states( who are the canaries in the coalmines as sea levels rise), and the numerous non-governmental organisations whose advocacy remind us all what we may have overlooked.

Secondly, this body will have a research and policy unit that will investigate and publish papers for public dissemination that cover the three pressing issues that the IPCC’s working groups have been diligently working on:

The science of climate change

Impacts, adaptation and vulnerability

Mitigation of climate change

Thirdly, this institution will deal with the impact and ramification of events such as BP’s monstrous catastrophe in the Gulf of Mexico. For the first time, powerful multinational companies will answer to a multinational body that has the mandate to exact responsibility and accountability from them. This is recognition that society expects companies to carry out their triple bottom line responsibilities:

Presently the variety of bodies who deal with global environmental issues are symptomatic of displacement, bureaucracy, lack of unity, inability to communicate with the rest of society, and a failure to articulate an overall vision for the environment.

We can organise globally and form institutions to deal with interconnected issues that affect us all. We do have the ability to cooperate internationally in the common interest. Most recently this was witnessed when the G20 countries cooperated and provided leadership regarding the global financial crisis, rather than face the risk of another Great Depression.

We need a global institution to defend the planet because the planet cannot defend itself. We are the stewards and guardians of this precious and fragile earth on which we dwell. Let the institution-building begin: a global environmental body to look after the health of the earth.

The Financial Times Global 500 and the proposed mining super profits tax

Last month, the Financial Times released its annual Global 500 list of the top 500 corporations around the world by market capitalisation.i The 14th edition of this list has chronicled China’s rise with PetroChina the planet’s most valuable at $329B, with its nearest rival the US’ Exxon at $316B into second place.

The list also provides clues of the economic shifts in power with 23 mainland Chinese companies (excluding Hong Kong) being represented while Japan’s most valuable company, Toyota, only making the list at 32. However, there were more Japanese companies in the list in the mid-rankings though not at the top 100. The notable exclusions in this list are of course the privately-held companies such as Cargill with listed rivals Monsanto at 177 and Nestle at 12.

The planet’s reliance on energy also was evident on the list with the following companies being the most valuable in their respective countries:

FT Global 500: Most valuable companies (all energy) by country

PetroChina (no.1, China)

ExxonMobil (no.2, USA)

BHP Billiton (no.6, Australia)

Vale (no.22, Brazil)

Gazprom (no.33, Russia)

Total (no.34, France)

Eni (no.53, Italy)

Saudi Basic (no.66, Saudi Arabia)

Reliance Industries (no.68, India)

Statoil (no.74, Norway)

BHP Billiton’s growth has seen it jump up from No.19 in the Global500 list last year to No.6 with a $209B market value. It remains Australia’s only top 10 entry in the Global 500.

The wealth generated by Australian mining companies has become a source of contention. The Australian Treasurer, Wayne Swan, recently announced proposals to charge a tax on the excess or super profits created by the resource companies. The Resource Super Profits Tax (RSPT) proposes to impose a levy of 40% on excess profits generated by mining companies in order to fund superannuation (pension) funds, to lower company tax and fund infrastructure needs.ii Arguably, the tax proposes to spread the country’s “common wealth” for the “common good” – a Robin Hood tax for the resources sector.

Not surprisingly, the powerful Australian mining lobby, the Minerals Council of Australia, is vehemently opposed to the proposal with a “Keep Mining Strong” campaign on all forms of mediaiiiiv The government of the state that will be most affected, Western Australia, has vehemently opposed its implementation though being from the opposite side of the political spectrum to the current Federal Government helps. including a social media presence on Twitter.

The RSPT is shaping to be a pivotal election issue with the Opposition Party supporting the Minerals Council in its stance.

Unprecedented in Australian corporate history, the CEO of publicly-listed high-end retailer David Jones Limited, Mark McInnes, resigned on 18 June 2010 after being accused of sexually harassing a 25 year old female employee on two separate occasions. McInnes admitted his conduct was unbecoming in his resignation statementv. A highly successful CEO who turned around the retailer’s fortunes during the 2000s, McInnes was one of the youngest CEOs in the country appointed at age 37 to head the company.

The Chair of David Jones, Robert Savage fronted a hurriedly organised press conference expressing his and the board’s deep disappointment at the CEO’s conduct. David Jones Limited has two female board members and around 80% of its workforce is comprised of women. The board has awarded the former CEO a $2 million severance package.

Keywords: crisis management, succession

Plane crash in the Congo: a company’s entire board disappears

On 21 June 2010, a plane chartered by Sundance Resources, an iron ore company with exploration interests in the region crashed “on the western ridge of the Avima Range in the Republic of Congo, near the Gabonese border.vi” The plane contained nearly all members of the board and company’s senior management including its Chair, MD and CEO, company secretary and three non-executive directors.vii

Navigating through bribery and corruption in China : the case of the Rio Tinto Four

On 30 March 2010, after a three-day trial, four Shanghai-based senior executives, including Australian citizen Stern Hu, from the iron-ore arm of the Anglo-Australian resource giant Rio Tinto (http://www.riotinto.com), were found guilty on charges of bribery and stealing commercial secrets or commercial espionage. They have been given lengthy sentences ranging from 7-14 years.

The four men were arrested last year in the wake of a failed transaction between Rio Tinto and China’s aluminium producer, stated-owned Chinalco (http://www.chinalco.com) Prior to the global financial crisis, Rio Tinto acquired Canada’s Alcan in November 2007 in part to ward off any overtures of a merger from its rival, the other Anglo-Australian resource giant, BHP Billiton (http://www.bhpbilliton.com). In the global financial crisis, Rio Tinto faced liquidity problems stemming from this costly acquisition. Chinalco offered to rescue Rio Tinto from its vulnerable predicament with a proposed strategic alliance. However, a combination of extraneous factors including a pessimistic outlook of the alliance from major institutional investors based in London and with global markets recovering, and internal changes in senior management at Rio Tinto, made the company walk away from a deal with Chinalco and instead pursued a joint venture with rival BHP Billiton. Had the transaction gone ahead, Chinalco would have had a more active influence on the iron ore market which was deemed to be unfavourable to Chinese steel interests.

The political response was not long in coming and the four executives were arrested initially charged with offering bribes (instead of receiving them). The arrest of the executives sent shock waves to Sino-Australian relations and the expatriate mining community in China. Regulatory and political risk mitigation strategies were set in motion for key executives based in some foreign companies in China. As Stern Hu was an ethnic Chinese, his successor is an Australian-born Mandarin speaker.

Timing, as they say is everything. Strong symbolism was placed with the opening of the trial in Shanghai coinciding with Rio Tinto’s CEO Tom Albanese’s address to the China Development Forum1 (see photo below)

In wake of the verdict, the Australian Foreign Minister, Stephen Smith, has called for transparency in the Chinese legal system as parts of the trial were closed to consular officials:

“As China emerges into the global economy, the international business community needs to understand with certainty what the rules are in China. What is unknown as a consequence of the lack of transparency is whether here we are simply dealing with information which would be normally and commercially available or whether we're dealing with something more broad than that."1 – Stephen Smith, Australian Foreign Minister

The oligopoly of the iron ore market controlled by three players - BHP Billiton, Rio Tinto and Brazil’s Vale (http://www.vale.com) means China’s resource-hungry growth will continue an uneasy reliance on these three mining giants for some time. Equally, the three resource giants will try and navigate a sometime complex relationship with their largest market. The Rio Tinto case serves as a reminder of the risks of doing business in country which still has under-developed legal institutions and the perception of a judiciary that is still largely politicised. For Rio Tinto, it has terminated the employment contracts of the four executives after the sentences were handed down.